5 Things to Beware of Before Investing in Cryptocurrency

Cryptocurrencies can be purchased through fintech platforms that promote crypto exchanges in India. You may sign up for these exchanges, complete your KYC, and begin trading tokens instantly. In India, both first-time and seasoned investors are interested to invest in Cryptocurrencies. However, most investors have a limited understanding of the crypto markets.

The behaviour of cryptocurrencies differs from that of conventional financial assets sold on the stock exchange. That is why Bitcoin is often referred to as "cryptoassets" by central banks. Cryptocurrencies, unlike financial assets, do not have balance sheets, nor are they issued by central banks or backed by governments. All of these characteristics make cryptocurrency a very risky investment.

Cryptocurrencies like Bitcoin and Ethereum are becoming more competitive in terms of returns every day. In the last year, the price of Bitcoin has increased by more than fourfold, and the price of Ethereum has increased by more than tenfold. Many individual investors have been enticed to try their hand at this new and exciting asset class because of the high returns. Cryptocurrencies, on the other hand, are one of the most volatile asset classes, with several aspects of them being steeped in complication.

When it comes to investing in Cryptocurrencies, one of the most challenging things for investors is to avoid getting caught up in the hype. Many individual and institutional investors have quickly included digital currencies in their portfolios. Experts, on the other hand, have continued to warn investors about the volatile and unpredictable nature of Cryptocurrencies.

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The cryptocurrency market has plummeted recently; according to CoinMarketCap data, the global market cap has dropped by 5.28% in the last few days. Bitcoin and Ethereum witnessed a significant decline in prices. Notably, the crypto market has experienced a significant downward trend as a result of many macroeconomic variables exerting pressure on both traditional and crypto markets around the world.

However, many investors enter the crypto market expecting large profits in a short period of time without understanding how Cryptocurrencies function or the risks involved. Given that, many novice investors are interested in this asset class but are not aware of the details, and they get swayed by what their peers say.

Before you jump onto the cryptocurrency bandwagon, it is crucial to do your research, just as you would with any other investment, to eliminate and safeguard from the inherent risks and unexpected outcomes.

Here are the 5 important things you should know before you consider investing in cryptocurrencies.

1. Cryptocurrencies Are Decentralised

Cryptocurrencies use blockchain technology to create decentralised networks. Blockchain is an organisational mechanism for ensuring transactional data integrity. Cryptocurrencies are decentralised, which means they are not controlled or regulated by any government entity.

It essentially means that 'crypto' is a form of a digital asset that is based on a network distributed across a large number of computers around the world. Governments and other authorities have no control over them because of their decentralised nature.

Currently, several governments and central banks are discussing how to regulate Cryptocurrencies while allowing them to exist for trade, investment, or technological innovation. It is worth noting that only a few nations have outlawed Cryptocurrencies, indicating that the world is rapidly realising that Cryptocurrencies may be the new normal to which we must adapt.

2. Speculative in Nature

Since Cryptocurrencies are still in an evolving stage, several financial experts believe that they will turn out to be a short-lived fad.

However, some financial experts believe that Cryptocurrencies will destabilise the current financial system and usher in a new transaction system. It's likely that the majority of Cryptocurrencies will not survive, and a handful of the best ones will. There is a dearth of understanding regarding numerous aspects of Cryptocurrencies, most notably their utility. Some treat it as currency, some use it for payments, others for participating in communities, while the majority regard it as a speculative investment.

Cryptocurrencies are not backed by an underlying asset. The performance of a corporation, for example, influences the price of a stock. The only thing that drives cryptocurrency values is speculation. Bitcoin's worth is mostly based on conjecture about its future value. As a result, Cryptocurrencies have been in a long-term bubble.

3. Highly Volatile

Blockchain-based investments, such as Bitcoin, are inherently volatile and unpredictable due to their speculative nature. Cryptocurrency values are incredibly volatile. They are traded 24×7 around the world, often by anonymous investors who can manipulate the market due to a lack of regulation.

There's a lack of information on what drives prices either way. Often, the whiff of regulatory action in any country can drive prices down. The volatility of the cryptocurrency market surpasses that of the stock market. The markets will be shocked if a stock index drops 10%. On crypto exchanges, though, 10% moves are virtually everyday events. A rapid rally can bring you money quickly, but a quick drop can wipe you out completely.

Bitcoin - the first Cryptocurrency and the largest now by value has witnessed a roller-coaster ride in recent years. Amidst the past few months due to the uncertainity in macroeconomic and geopolitical factors, Bitcoin has faced price fluctuations.

As of May 27, 2022, Bitcoin is trading below $30,000. The latest downturn in the crypto market has resulted in a precipitous drop in cryptocurrency values. If you are not comfortable with extreme volatility and do not hold a stomach for excessive volatility, stay away from Cryptocurrencies.

4. Subject to Cyberattacks

Cryptocurrencies, despite being built on extremely secure blockchain technology, may be vulnerable to cybersecurity risks. While a blockchain can be secure, the exchanges that play a critical role in boosting the amount of crypto trading, enabling Bitcoin and other such currencies, do not use the same technology. As a result, they are vulnerable to a variety of cyberattacks.

Scammers are impersonating or spoofing social media identities in order to deceive consumers into giving them access to their cryptocurrency wallets. There have been a few cases where major crypto exchanges have been hacked, and many investors have lost their cryptocurrency holdings.

The different parts of the virtual ecosystem, like exchanges that allow you to trade cryptocurrencies, or digital wallets, may not be entirely immune to cyber hackers. For instance, in the case of Bitcoin, many online exchanges were infiltrated with hacking and theft of coins worth millions of dollars.

As a result, several of the world's largest exchanges are rushing to put a framework and robust systems and protocols to safeguard themselves against cyber assaults, fearful that forthcoming cryptocurrency regulation will hold these fintech platforms liable for investor losses.

5. Gains from Cryptocurrency Are Taxed in India

Although these virtual online currencies are still unregulated, gains made from them are subject to capital gains tax as per the Income Tax Act in a way similar to gold. Recently, the Finance Minister announced a 30% tax on earnings on the transfer of virtual digital assets.

According to the Union Budget 2022-23 Memorandum, "The proposed section 115BBH seeks to provide that where the total income of an assessee includes any income from transfer of any virtual digital asset, the income tax payable shall be the aggregate of the amount of income-tax calculated on the income of transfer of any virtual digital asset at the rate of 30%. The amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of the income from transfer of virtual digital asset."

Your gains could be classified as short-term or long-term gains, given the duration of your holding. The details are filled either in the business income or other income in your returns. India has implemented a tax on Cryptocurrencies w.e.f April 01, 2022; the crypto industry is bracing itself for the impact of new crypto rules.

To conclude...

With nearly a crore customers, India today has roughly 11 cryptocurrency trade sites. Due to constant advances in the digital landscape and widespread promotions of cryptocurrency investment across media platforms, investment in Cryptocurrencies has recently gained substantial popularity among Indians.

In addition, a new generation of risk-tolerant investors is eager to invest in the cryptocurrency market. Despite the fact that Cryptocurrencies appear to be a rewarding alternative investment, keep in mind that they are extremely risky. Many investors are seeking cryptocurrency assistance due to technological advancements and a future-oriented outlook.

Do note that, whether cryptocurrency is the future of money or not, you should avoid investing in it until you've done through research. Due to the lack of macro fundamentals driving price movement, Cryptocurrencies are still relatively new and unreliable. Retail investors should avoid cryptocurrency and should not be swayed by past gains.

As regards the technology backing Cryptocurrencies, i.e., Blockchain is quite innovative and promising. Several fund houses, including Invesco, Navi, and others, have launched blockchain-focused mutual funds. If you're interested in investing in blockchain technology, you might want to look at equity-oriented funds with a blockchain theme.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst